Men are liquid assets — Startups are not — Choose wisely
Part 1 — People and Idea
When browsing for men and startups online (on different sites), I spend more time studying the startups to invest in versus the men I choose to date.
Why? Men are liquid assets. Easy to acquire and dispose of. If there’s no return on my investment, no laughter, equipment doesn’t work, etc. — he’s out.
But startups are an illiquid asset. When I invest in a startup I know I’m all-in until either the company is acquired, goes public or dies. That could take two to eight years.
So when you choose to invest in a startup — choose wisely. Here’s part one of a three part series on how the venture capital and angel investing industry evaluates startup investment opportunities.
The six criteria I will highlight are people, idea, market, co-investors, traction, and valuation. In each article I will feature two of the six.
Overall, be flexible — just like when you’re looking for a date with your “list” you will not often find a startup that checks every box evenly. Some boxes will outshine the others.
When choosing a startup, you are investing first in the people, then the idea. If the team can’t execute the vision, there’s no future. The founders must have more than passion, drive and a burning desire to make a difference.
Venture Capitalist Mark Suster says, “About 70% of my investment decision of an early-stage company is the team. My rationale is simple: everything goes wrong and only great teams can respond to competitors, markets, funding environments, staff departures, PR disasters and the like.”
When evaluating a team, study their education and industry expertise. What roles did they have in former startups? Were they successful entrepreneurs before? Activate your heat seeker to find the fire in their belly. I love the investing platform I work with, OurCrowd, because each founder records a webinar where you can hear their passion when they tell their story.
Beyond the founder — it’s the team they build around them. Just like in dating, you should never choose from the low hanging fruit of the willing and available; a startup team should be carefully crafted for success with each person selected for their specific skills, resources and network.
Leadership author John C. Maxwell says it best “Teamwork makes the dream work, but a vision becomes a nightmare when the leader has a big dream and a bad team.”
At heart when we invest in a startup we are investing in an idea that will change the future.
Behind the idea has to be a story the founders tell. They are personally connected to a problem they believe they can solve. Y Combinator Partner Paul Graham says, “The very best startup ideas tend to have three things in common: they’re something the founders themselves want, that they themselves can build, and that few others realize are worth doing. Microsoft, Apple, Yahoo, Google, and Facebook all began this way.”
When investing in startups look for an idea that is unique and will fill a void in a large market. Simply search their concept online and see what else is out there. Then question why they are different and how would they will be able to become a leader in their market.
Ideally, the idea cannot be easily replicated. In the industry we call this factor a “high barrier to entry”. Personally I am attracted to startups with a technology or service that can be patented or trademarked. Intellectual property protection allows a startup time to build an audience and grow.
Finally, the clearest way to evaluate an idea is to simply ask whether or not there are customers who are willing to pay for it. In 2013 Steve Blank rocked the startup world with his Harvard Business Review article “Why the Lean Start-Up Changes Everything”. The lesson is to create a feedback loop where ideas are first presented to potential customers and continually tweaked before the company launches. The entrepreneurs go to potential customers and ask, do you have this problem, would you be willing to pay to solve it and what does that solution look like? Then they build it.
Even with a charismatic entrepreneur with a brilliant idea, be careful not to fall in love with every startup you see.
Never chase trains, (wo)men or startups — because there’s always another one coming along.
Even when you master how to evaluate a startup you must internalize a healthy dose of skepticism and humility in your ability to pick the winners. In Daniel Kahneman’s book Thinking, Fast and Slow he says, “Success = talent + luck; Great Success = a little more talent + a lot of luck.”
These formulas illustrate an important theme in the book. Kahneman feels that luck “plays a very large role in every story of success.”
Whether you’re trying to get lucky in love or picking a winning startup — choose wisely.
Look next week more on the series on evaluating startups to focus on the market, co-investors, traction, and valuation.
The Angel in the Crowd blog is for smart investors who want to learn about investing in startups via equity crowdfunding websites.
Note: These are my personal views, not the opinion of my company or friends. I am not a financial advisor nor a love guru. Please discuss with your personal advisors before investing your time, heart, and money.